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May 27, 2023
Dollar use of official Reserves fell to a 20-year low. According to data from the International Monetary Fund, the decline in the Dollar is even 58% in the fourth quarter of 2022. This trend of de-dollarization will have a very significant effect.
The US Central Bank is now placing the Dollar as the primary focus to support their economy during the crisis. This is because many countries have yet to abandon using US Dollars. Despite the challenges, de-dollarization is a real threat.
A country to de-dollarize must have a vast network of exporters, importers, currency traders, debt issuers, and lenders to decide to leave the Dollar in international transactions, and China appears to be fulfilling this.
According to Barry Eichengreen, a Berkeley professor of economics and political science, the Dollar has a function of mutually reinforcing. He considers that no mechanism can simultaneously make banks and governments change their behavior (de-dollarization).
Toscafund Hong Kong executive Mark Tinker said: "This process (de-dollarization) is ongoing. Dollars will be used less in the global system."
Meanwhile, the First Vice President of Iran said this trend is not a voluntary choice but a response needed to arm the Dollar to make it even stronger.
Because in recent years, the arsenal against the Dollar has forced countries to find ways to offset the impact of possible future sanctions. And he said that de-dollarization is a severe threat to the United States internationally.
However, this trend is accelerating, and in recent years, many countries have begun to discuss not using the Dollar as their reserve currency anymore. And this will help their economy not depend on US economic conditions.
This is done by reducing dependence on the US dollar in international trade and financial transactions. This economic strategy and monetary policy were also very effective in creating economic independence, so many countries began implementing them.
Starting from Turkey, which said that it would increase the liquidity of the local currency, both at the government and private levels. India has also made efforts to de-dollarize to protect the country's economy from US fluctuations by using local currencies in bilateral trade.
India, which conducts many transactions with major trading partners such as China and Russia, now uses a non-dollar payment system. And China is the country most willing to change the condition of the payment system, which is controlled by the US dollar.
China even launched an international Cross-Border Interbank Payment System (CIPS) payment system. China is pushing for this deal with every country willing to trade with China.
Russia, Iran, and Indonesia also have their de-dollarization policies. Russia started doing this after being sanctioned by the US. Meanwhile, Indonesia has entered Local Currency Settlements with Thailand, Malaysia, Japan, and China in every bilateral transaction.
China's position on the international level has put pressure on the Dollar even more. In data recently released, the global central bank said that the use of the Yuan had reached a record. This is due to the cross-border interbank payment system,
The Yuan's increase increasingly indicates that a global de-dollarization swing is taking place. For that reason, the Yuan is considered a potential alternative for international transactions because almost all bilateral transactions involving China have used Yuan.
The US has pushed for a currency swap policy with Canada, England, Japan, Switzerland, and Europe. The Fed fears a reduction in the use of the Dollar internationally.
Throwing dollars triggered by geopolitical conditions will have a significant impact. This is not only towards the US economy, trade, and the global economy. But with more and more use of the Yuan, this is enough to indicate that de-dollarization is taking place.
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